History Makes the Case for Personal Accounts

Please find the attached RPC Policy Paper, “History Makes the Case for Personal Accounts,” by Jason Thomas, released May 4, 2005.

This paper reviews Social Security’s history to demonstrate that Social Security surpluses can be saved only if an ownership right is assigned to them. Congress should create personal retirement accounts as a part of Social Security modernization to grant individual workers this ownership right and build real savings.

Under the current unified budget, annual Social Security payroll tax revenue in excess of annual Social Security outlays is effectively double-counted: on the one hand, the surplus is spent to fund current government outlays on programs like food stamps, agricultural price supports, federal student loans, and child nutrition; on the other hand, the surplus is credited to a Treasury account, known as the Social Security Trust Fund, where it will earn interest.

Although the practice of “double-counting” Social Security surpluses has existed since the 1930s, this was of less consequence in the past because the program was funded on a pay-as-you-go (PAYGO) basis, which meant that the Trust Fund balance (and unfunded liability it represents) would remain small.

This ended with passage of the Social Security Act Amendments of 1983, which led to the build up of a Trust Fund balance that will grow to a level nearly eight times larger, as a share of the economy, than its average during the PAYGO era (1940-1983).

Since 1984, the Social Security Trust Fund account has been credited with $1.7 trillion – despite the fact that those funds have already been spent on other programs. In other words, there is no money in the Trust Fund – only a promise that General Fund revenues will be used to pay Social Security benefits when payroll taxes are insufficient by themselves.

Because the surpluses were not saved, but were spent instead, the most recent estimates suggest that it will ultimately cost the General Fund $5.4 trillion (in constant 2005 dollars) to reimburse Social Security for all of the money Congress is scheduled to spend. Instead of continuing on the current path, Congress must embrace real pre-funding through the creation of personal retirement accounts. Personal accounts are the only means to convert Social Security financing from the curse of compounding debt to the blessing of compounding wealth.